If you’re like me, home renovation shows get me hooked. Except, they make it look pretty easy when you see professionals with a huge budget being able to flip a rundown shack into a gorgeous tiny home. If you’re up for the challenge of buying a property and flipping it for a profit, you’re in the right place. As a professional mortgage broker, I can help you get pre-approved to ensure you’re qualified for a mortgage on another property so you can house hunt with confidence. As a financial advisor, I can help you create the financial plan you need to not only buy that income property but, also finances the renovations needed to turn a solid profit. Before plotting about taking down walls and expanding the kitchen in your income-generating dreams though ask yourself these questions. After all, the goal is to make money by selling and flipping the property, right?! You don’t want to overlook a pitfall you could have avoided because you were a bit too zealous when it came to buying it.
How does flipping a house work?
Investors who want to flip a property aim to buy low and sell high. This can be a great way to generate a steady flow of income if you flip houses often. Many investors want to speed up the process and renovate quickly to limit costs and risks – the market could crash, and they may be paying for two mortgages which could exceed their budgets if they don’t plan carefully. Each day they wait to sell, they have to pay for insurance, utilities, property taxes, mortgages, and other costs that come with owning a home.
An investor may pick up a home in a booming neighbourhood, make a couple of renovations and then sell for more money. However, flipping homes always comes with a risk factor so having a financial safety net just makes sense.
How much should you pay for a house when you are planning on flipping it?
The easy answer is “don’t pay too much”. You need to do your research to know how much it’s worth. If this is your first time, work with a real estate agent who knows the housing market like the back of their hand to ensure you’re getting the property for a good deal.
Think about the number of repairs you want to do up front and the costs of each. Did you notice the kitchen layout is strange? Does the bathroom need a new bathtub? Does the roof look like it needs to be replaced? Factor in these costs when looking at the initial price of the home before you fall in love with the thought of how much money you could make off it when you sell it.
To figure out the ideal purchase price, make sure you don’t pay more than 70% of the after-repair value (ARV) of a property minus the repairs needed. For example, if you want to sell a home for $250,000, which needs $35,000 in repairs, you should not pay more than $140,000 before repairs. ($250,000 x 0.70 = $175,000 – $35,000 = $140,000)
This formula will limit your financial risk and increase the chance of maximizing your profit.
Key things to remember when flipping a home
- If you’re looking to get rich quickly… think again.
Flipping houses is a side hustle, so treat it like a full-on business. It requires knowledge and lots of planning to make a profit. Common mistakes are underestimating how long and how much money the projects will require. It’s not as simple as replacing the kitchen and putting on a fresh coat of paint. You would pay for a mortgage, land transfer fees, property acquisition costs, insurance, closing costs, etc.
- Flipping the house won’t happen overnight.
Ask yourself this: is it worth spending all the time working on the home to sell it? It can take months to not only find the perfect project but also to finish the renovations. If you have a day job, it makes it even harder to plan time in the evenings and on weekends to actually do the work. Having a professional do it for you adds to the cost of all the renovations which can affect your profit in the end. Once the home is ready to put on the market, you have to schedule inspections to make sure it complies with building codes. If you plan on showing the property to potential buyers yourself, you will have to factor in the time it takes to host those showings, scheduling, and email management.
- Be honest with yourself… are you capable of doing all these home renovations?
If you’re not an expert, ask another person to jump in. Don’t overestimate your skills and knowledge. If you do it right the first time, it could save you lots of money. No one wants your plumbing to go rogue and end up flooding the basement that you already worked on and polished up.
- You must get pre-approved for a mortgage.
Buying a second, or third property requires specific documentation to prove to your lender that you’re able to afford another home. If you use a mortgage or a home equity line of credit (HELOC) to finance your house-flipping purchase, only the interest is deductible. The principal, taxes, and insurance portions of your payments are not. As a professional mortgage broker, I can help you secure the best mortgage type, options, and rates that suit the goals of the property while finding you the lowest mortgage rates possible. Use my mortgage calculator to compare mortgage rates and start your budgeting process. If you’re lucky enough to pay for the property in cash, remember that there are holding costs that could slow down the process of buying, and flipping the home.
Overall, if you want to kick-start your house-flipping journey, I’m only a phone call away. Make sure you understand what it takes and the risks involved. It’s always a learning journey, but a rewarding one in the end if done with street smarts. Let’s get you pre-approved for a mortgage first to ensure you’re financially sound enough to buy that home to get the ball rolling. Give me a call at 705-315-0516 to get started. And remember; home renovation shows make it look easy! If you’re going to go for it, be ready to dig in.